The Burden of the London Settlement

The settlement of Reparations communicated to Germany by the Allied Powers on May 5, 1921, and accepted a few days later, constitutes the definitive scheme under the Treaty according to which Germany for the next two generations is to discharge her liabilities.[32] It will not endure. But it is the fait accompli of the hour, and, therefore, deserves examination.[33]

The settlement falls into three parts comprising (1) provisions for the delivery of Bonds; (2) provisions for setting up in Berlin an Allied Committee of Guarantees; (3) provisions for actual payment in cash and kind.

1. The Delivery of Bonds.—These provisions are the latest variant of similar provisions in the Treaty itself. Allied Finance Ministers have encouraged themselves (or their constituents) with the hope that some part of the capital sum of Germany's liabilities might be anticipated by the sale to private investors of Bonds secured on future Reparation payments. For this purpose it was necessary that Germany should deliver negotiable Bonds. These Bonds do not constitute any additional burden on Germany. They are simply documents constituting a title to the sums which, under other clauses, Germany is to pay over annually to the Reparation Commission.

The advantages to the Allies of marketing such Bonds are obvious. If they could get rid of the Bonds they would have thrown the risk of Germany's default on to others; they would have interested a great number of people all over the world in Germany's not defaulting; and they would have secured the actual cash which the exigencies of their Budgets demand. But the hope is illusory. When at last a real settlement is made, it may be practicable for the German Government to float an international loan of moderate amount, well within the world's estimate of their minimum capacity of payment. But, though there are foolish investors in the world, it would be sanguine to believe that there are so many of such folly as to swallow at this moment on these lines a loan of vast dimensions. It costs France at the present time somewhere about 10 per cent to float a loan of modest dimensions on the New York market. As the proposed German Bonds will carry 5 per cent interest and 1 per cent sinking fund, it would be necessary to reduce their price to 57 before they would yield 10 per cent including redemption. It would be very optimistic, therefore, to expect to market them at above half their par value. Even so, the world is not likely to invest in them any large proportion of its current savings, so that the whole amount even of the A Bonds, specified below, could not be marketed at this price. Moreover, in so far as the service of the Bonds marketed is within the minimum expectation of Germany's capacity to pay (as it would have to be), the financial effect on the Ally which markets the Bonds is nearly the same as though they were to borrow themselves at the rate in question. Except, therefore, in the case of those Allies whose credit is inferior to Germany's, the advantage compared with borrowing on their own credit would not be very material.[34]

The details relating to the Bonds are not likely, therefore, to be operative, and need not be taken very seriously. They are really a relic of the pretenses of the Peace Conference days. Briefly, the arrangements are as follows:

Germany must deliver 12 milliards of gold marks ($3,000,000,000) in A Bonds, 38 milliards ($9,500,000,000) in B Bonds, and the balance of her liabilities, provisionally estimated at 82 milliards ($20,500,000,000), in C Bonds. All the Bonds carry 5 per cent interest and 1 per cent cumulative sinking fund. The services of the series A, B, and C constitute respectively a first, second, and third charge on the available funds. The A Bonds are issued to the Reparation Commission as from May 1, 1921, and the B Bonds as from November 1, 1921, but the C Bonds shall not be issued (and shall not carry interest in the meantime) except as and when the Reparation Commission is of the opinion that the payments which Germany is making under the new settlement are adequate to provide their service.

It may be noticed that the service of the A Bonds will cost $180,000,000 per annum, a sum well within Germany's capacity, and the service of the B Bonds will cost $570,000,000 per annum, making $750,000,000 altogether, a sum in excess of my own expectations of what is practicable, but not in excess of the figure at which some independent experts, whose opinion deserves respect, have estimated Germany's probable capacity to pay. It may also be noticed that the aggregate face value of the A and B Bonds ($12,500,000,000) corresponds to the figure at which the German Government have agreed (in their counter–proposal transmitted to the United States) that their aggregate liability might be assessed. It is probable that, sooner or later, the C Bonds at any rate will be not only postponed, but canceled.

2. The Committee of Guarantees.—This new body, which is to have a permanent office in Berlin, is in form and status a sub–commission of the Reparation Commission. Its members consist of representatives of the Allies represented on the Reparation Commission, with a representative of the United States, if that country consents to nominate.[35] To it are assigned the various wide and indefinite powers accorded by the Treaty of Peace to the Reparation Commission, for the general control and supervision of Germany's financial system. But its exact functions, in practice and in detail, are still obscure.

According to the letter of its constitution the Committee might embark on difficult and dangerous functions. Accounts are to be opened in the name of the Committee, to which will be paid over in gold or foreign currency the proceeds of the German Customs, 26 per cent of the value of all exports and the proceeds of any other taxes which may be assigned as a “guarantee” for the payment of Reparation. These receipts, however, chiefly accrue not in gold or foreign currency, but in paper marks. If the Committee attempts to regulate the conversion of these paper marks into foreign currencies, it will in effect become responsible for the foreign exchange policy of Germany, which it would be much more prudent to leave alone. If not, it is difficult to see what the “guarantees” really add to the other provisions by which Germany binds herself to make payments in foreign money.

I suspect that the only real and useful purpose of the Committee of Guarantees is as an office of the Reparation Commission in Berlin, a highly necessary adjunct; and the clause about “guarantees” is merely one more of the pretenses, which, in all these agreements, the requirements of politics intermingle with the provisions of finance. It is usual, particularly in France, to talk much about “guarantees,” by which is meant, apparently, some device for making sure that the impossible will occur. A “guarantee” is not the same thing as a “sanction.” When M. Briand is accused of weakness at the Second Conference of London and of abandoning France's “real guarantees,” these provisions enable him to repudiate the charge indignantly. He can point out that the Second Conference of London not only set up a Committee of Guarantees but secured, as a new and additional guarantee, the German Customs. There is no answer to that![36]

3. The Provisions for Payment in Cash and Kind.—The Bonds and the Guarantees are apparatus and incantation. We come now to the solid part of the settlement, the provisions for payment.

Germany is to pay in each year, until her aggregate liability is discharged:

(1) Two milliard gold marks.

(2) A sum equivalent to 26 per cent of the value of her exports, or alternatively an equivalent amount as fixed in accordance with any other index proposed by Germany and accepted by the Commission.

(1) is to be paid quarterly on January 15, April 15, July 15, and October 15 of each year, and (2) is to be paid quarterly on February 15, May 15, August 15, and November 15 of each year.

This sum, calculated on any reasonable estimate of the future value of German exports, is materially less than the original demands of the Treaty. Germany's total liability under the Treaty amounts to 138 milliard gold marks (inclusive of the liability for Belgian debt). At 5 per cent interest and 1 per cent sinking fund, the annual charge on this would be 8.28 milliard gold marks. Under the new scheme the annual value of Germany's exports would have to rise to the improbable figure of 24 milliard gold marks before she would be liable for so much as this. As we shall see below, the probable burden of the new settlement in the near future is probably not much more than half that of the Treaty.

There is another important respect in which the demands of the Treaty are much abated. The Treaty included a crushing provision by which the part of Germany's nominal liability on which she was not able to pay interest in the early years was to accumulate at compound interest.[37] There is no such provision in the new scheme; the C Bonds are not to carry interest until the receipts from Germany are adequate to meet their service; and the only provision relating to back interest is for the payment of simple interest in the event of there being a surplus out of the receipts.

In order to understand how great an advance this settlement represented it is necessary to carry our minds back to the ideas which were prevalent not very long ago. The following table is interesting, in which, in order to reduce capital sums and annual payments to a common basis of comparison, estimates in terms of capital sums are replaced by annuities of 6 per cent of their amount:

The estimate of The Economic Consequences of the Peace (1919), namely 2 milliards, was nearly contemporaneous with M. Klotz's figure of 18 milliards. M. Tardieu recalls that, when the Peace Conference was considering whether a definite figure could be inserted in the Treaty, the lowest figure which the British and French Prime Ministers would accept, as a compromise to meet the pressure put upon them by the American representatives, corresponded to an annuity of 10.8 milliards,[40] which is nearly two and a half times the figure which they accepted two years later under the pressure, not of Americans, but of facts.

There was yet another feature in the London Settlement which recommended it to moderate opinion. The dates of payment were so arranged as to reduce the burden on Germany during the first year. The Reparation year runs from May 1 in each year to April 30 in the next; but in the period May 1, 1921–April 30, 1922 only two, instead of four, of the quarterly payments in respect of the export proportion will fall due.

No wonder, therefore, that this settlement, so reasonable in itself compared with what had preceded it, was generally approved and widely accepted as a real and permanent solution. But in spite of its importance for the time being, as a preservative of peace, as affording a breathing space, and as a transition from foolish expectations, it cannot be a permanent solution. It is, like all its predecessors, a temporizing measure, which is bound to need amendment.

To calculate the total burden, it is necessary to estimate the value of German exports. In 1920 they amounted to about 5 milliard gold marks. In 1921 the volume will be greater, but this will be offset by the fact that gold prices have fallen to less than two–thirds of what they were, so that 4 to 5 milliard gold marks is quite high enough as a preliminary forecast for the year commencing May 1, 1921.[41] It is, of course, impossible to make a close estimate for later years. The figures will depend, not only on the recovery of Germany, but on the state of international trade generally, and more especially on the level of gold prices.[42] For the next two or three years, if we are to make an estimate at all, 6 to 10 milliards is, in my judgment, the best one can make.

Twenty–six per cent of exports, valued at 6 milliards gold, will amount to about 1½ milliard gold marks, making, with the fixed annual payment of 2 milliards, 3½ milliards altogether. If exports rise to 10 milliards, the corresponding figure is 4½ milliards. The table of payments in the near future is then as shown on the next page, all the figures being in terms of milliards of gold marks. In the case of payments after May 1, 1922, I give alternative estimates on the basis of exports on the scale of 6 and 10 milliards respectively.

Not the whole of these sums need be paid in cash, and the value of deliveries in kind is to be credited to Germany against them. This item has been estimated as high as 1.2 to 1.4 milliard gold marks per annum. The result will chiefly depend (1) on the amount and price of the coal deliveries, and (2) on the degree of success which attends the negotiations between France and Germany for the supply by the latter of materials required for the repair of the devastated area. The value of the coal deliveries depends on factors already discussed on p. 49, above, the price of the coal being chiefly governed by the internal German price. At a price of 20 gold marks per ton and deliveries of 2,000,000 tons a month (neither of which figures are likely to be exceeded, or even reached, in the near future), coal will yield credits of .48 milliard gold marks. In the Loucheur–Rathenau Agreement[43] the value of deliveries in kind to France, including coal, over the next five years has been estimated at a possible total of 1.4 milliard gold marks per annum. If France receives .4 milliard gold marks in coal, not more than 35 per cent of the balance will be credited in the Reparation account. If this were realized, the aggregate deliveries in kind might approach 1 milliard. But, for various reasons, political and economic, this figure is unlikely to be reached, and if as much as .75 milliards per annum is realized from coal and reconstruction deliveries, this ought to be considered a highly satisfactory result.

Now the payments were so arranged as to present no insuperable difficulties during 1921. The instalment of August 31, 1921 (which did not exceed the sum which the Germans had themselves offered for immediate payment in their counterproposal of April 1921) was duly paid, partly out of foreign balances accumulated before May 1 last, partly by selling out paper marks over the foreign exchanges, and partly by temporary advances from an international group of bankers. The instalment of November 15,1921, was covered by the value of deliveries of coal and other material subsequent to May 1, 1921. Even the instalments of January 15 and February 15, 1922, might be covered out of further deliveries, temporary advances, and the foreign assets of German industrialists, if the German Government could get hold of them. But the payment of April 15, 1922, must present more difficulty; whilst further instalments follow quickly on May 15, July 15, and August 15. Some time between February and August 1922 Germany will succumb to an inevitable default. This is the maximum extent of our breathing space.[44]

That is to say, in so far as she depends for payment (as in the long run she must do) on current income. If capital, non–recurrent resources become available, the above conclusion will require modification accordingly. Germany still has an important capital asset untouched—the property of her nationals now sequestered in the hands of the Enemy–Property Custodian in the United States, of which the value is rather more than 1 milliard gold marks. If this were to become available for Reparation, directly or indirectly, default could be delayed correspondingly.[45] Similarly the grant to Germany of foreign credits on a substantial scale, even three–months' credits from bankers on the security of the Reichsbank's gold, would postpone the date a little, however useless in the long run.

In reaching this conclusion, one can approach the problem from three points of view: (1) the problem of paying outside Germany, that is to say, the problem of exports and the balance of trade; (2) the problem of providing for payment by taxation, that is to say, the problem of the Budget; (3) the proportion of the sums demanded to the German national income. I will take them in turn, confining myself to what Germany can be expected to perform in the near future, to the exclusion of what she might do in hypothetical circumstances many years hence.

(1) In order that Germany may be able to make payments abroad, it is necessary, not only that she should have exports, but that she should have a surplus of exports over imports. In 1920, the last complete year for which figures are available, so far from a surplus there was a deficit, the exports being valued at about 5 milliard gold marks and the imports at 5.4 milliards. The figures for 1921 so far available indicate not an improvement but a deterioration. The myth that Germany is carrying on a vast and increasing export trade is so widespread, that the actual figures for the six months from May to October 1921, converted into gold marks, may be given with advantage:

In respect of these six months Germany must make a fixed payment of 1000 million gold marks plus 26 per cent of the exports as above, namely 484.8 million gold marks, that is 1484.8 million gold marks altogether, which is equal to about 80 per cent of her exports; whereas apart from any Reparation payments, she had a deficit on her foreign trade at the rate of more than 1 milliard gold marks per annum. The bulk of Germany's imports are necessary either to her industries or to the food supply of the country. It is therefore certain that with exports of (say) 6 milliards she could not cut her imports so low as to have the surplus of 3½ milliards, which would be necessary to meet her Reparation liabilities. If, however, her exports were to rise to 10 milliards, her Reparation liabilities would become 4.6 milliards. Germany, to meet her liabilities, must therefore raise the gold–value of her exports to double what they were in 1920 and 1921 without increasing her imports at all.

I do not say that this is impossible, given time and an overwhelming motive, and with active assistance by the Allies to Germany's export industries; but does any one think it practicable or likely in the actual circumstances of the case? And if Germany succeeded, would not this vast expansion of exports, unbalanced by imports, be considered by our manufacturers to be her crowning crime? That this should be the case even under the London Settlement of 1921 is a measure of the ludicrous folly of the figures given out in the British General Election of 1918, which were six times as high again.

(2) Next there is the problem of the Budget. For Reparation payments are a liability of the German Government and must be covered by taxation. At this point it is necessary to introduce an assumption as to the relation between the gold mark and the paper mark. For whilst the liability is fixed in terms of gold marks, the revenue (or the bulk of it) is collected in terms of paper marks. The relation is a very fluctuating one, best measured by the exchange value of the paper mark in terms of American gold dollars. This fluctuation is of more importance over short periods than in the long run. For in the long run all values in Germany, including the yield of taxation, will tend to adjust themselves to an appreciation or depreciation in the value of the paper mark outside Germany. But the process may be a very slow one, and, over the period covered by a year's budget, unanticipated fluctuations in the ratio of the gold to the paper mark may upset entirely the financial arrangements of the German Treasury.

This disturbance has of course occurred on an unprecedented scale during the latter half of 1921. Taxation in terms of paper marks, which was heavy when the dollar was worth 50 paper marks, becomes very inadequate when the dollar is worth 200 paper marks; but it is beyond the power of any Finance Minister to adjust taxation to such a situation quickly. In the first place, when the fall in the external value of the mark is proceeding rapidly, the corresponding fall in the internal value lags far behind. Until this adjustment has taken place, which may occupy a considerable time before it is complete, the taxable capacity of the people, measured in gold, is less than it was before. But even then a further interval must elapse before the gold–value of the yield of taxation collectible in paper marks can catch up. The experience of the British Inland Revenue Department well shows that the yield of direct taxation must largely depend on the taxable assessments of the previous period.

For these reasons the collapse of the mark exchange must, if it persists, destroy beyond repair the Budget of 1921–22, and probably that of the first half of 1922–23 also. But I should be overstating my argument if I were to base my conclusions on the figures current at the end of 1921. In the shifting sands in which the mark is foundering it is difficult to find for one's argument any secure foothold.

During the summer of 1921 the gold mark was worth, in round figures, 20 paper marks. The internal purchasing power of the paper mark for the purposes of working–class consumption was still nearly double its corresponding value abroad, so that one could scarcely say that equilibrium had been established. Nevertheless, the position was very well adjusted compared with what it has since become. As I write (December 1921) the gold mark has been fluctuating between 45 and 60 paper marks, while the purchasing power of the paper mark inside Germany is for general purposes perhaps three times what it is outside Germany.

Since my figures of Government revenue and expenditure are based on statements made in the summer of 1921, perhaps my best course is to take a figure of 20 paper marks to the gold mark. The effect of this will be to understate my argument rather than the contrary. The reader must remember that, if the mark remains at its present exchange value long enough for internal values to adjust themselves to that rate, the items in the following account, the income and the outgoings and the deficit, will all tend to be multiplied threefold.

At this ratio (of 20 paper marks=1 gold mark), a Reparation liability of 3½ milliard gold marks (assuming exports on the scale of 6 milliards) is equivalent to 70 milliard paper marks, and a liability of 4½ milliards (assuming exports of 10 milliards) is equivalent to 90 milliard paper marks. The German Budget for the financial year April 1, 1921, to March 31, 1922, provided for an expenditure of 93.5 milliards, exclusive of Reparation payments, and for a revenue of 59 milliards.[48] Thus the present Reparation demand would by itself absorb more than the whole of the existing revenue. Doubtless expenditure can be cut down, and revenue somewhat increased. But the Budget will not cover even the lower scale of the Reparation payments unless expenditure is halved and revenue doubled.[49]

If the German Budget for 1922–23 manages to balance, apart from any provision for Reparation, this will represent a great effort and a considerable achievement. Apart, however, from the technical financial difficulties, there is a political and social aspect of the question which deserves attention here. The Allies deal with the established German Government, make bargains with them, and look to them for fulfilment. The Allies do not extract payment out of individual Germans direct; they put pressure on the transitory abstraction called Government, and leave it to this to determine and to enforce which individuals are to pay, and how much. Since at the present time the German Budget is far from balancing even if there were no Reparation payments at all, it is fair to say that not even a beginning has yet been made towards settling the problem of how the burden is to be distributed between different classes and different interests.

Yet this problem is fundamental. Payment takes on a different aspect when, instead of being expressed in terms of milliards and as a liability of the transitory abstraction, it is translated into a demand for a definite sum from a specific individual. This stage is not yet reached, and until it is reached the full intrinsic difficulty will not be felt. For at this stage the struggle ceases to be primarily one between the Allies and the German Government and becomes a struggle between different sections and classes of Germans. The struggle will be bitter and violent, for it will present itself to each of the contesting interests as an affair of life and death. The most powerful influences and motives of self–interest and self–preservation will be engaged. Conflicting conceptions of the end and nature of Society will be ranged in conflict. A Government which makes a serious attempt to cover its liabilities will inevitably fall from power.

(3) What relation do the demands bear to the third test of capacity, the present income of the German people? A burden of 70 milliard paper marks (if we may, provisionally, adopt that figure as the basis of our calculations) amounts, since the population is now about 60 millions, to 1170 marks per head for every man, woman, and child.

The great changes in money values have made it difficult, in all countries, to obtain estimates of the national income in terms of money under the new conditions. The Brussels Conference of 1920, on the basis of inquiries made in 1919 and at the beginning of 1920, estimated the German income per head at 3900 paper marks. This figure may have been too low at the time, and, on account of the further depreciation of the mark, is certainly too low now. A writer in the Deutsche Allgemeine Zeitung (Feb. 14, 1921), working on the statistics of statutory deductions from wages and on income–tax, arrived at a figure of 2333 marks per head. This figure also is likely to be too low, partly because the statistics must mainly refer to earlier dates when the mark was less depreciated, and partly because all such statistics necessarily suffer from evasions. At the other extreme lies the estimate of Dr. Albert Lansburgh, who, by implication (Die Bank, March 1921), estimated the income per head at 6570 marks.[50] Another recent estimate is that of Dr. Arthur Heichen in the Pester Lloyd (June 5, 1921), who put the figure at 4450 marks. In a newspaper article published in various quarters in August 1921 I ventured to adopt the figure of 5000 marks as the nearest estimate I could make. In fixing on this figure I was influenced by the above estimates, and also by statistics as to the general level of salaries and wages. Since then I have looked into the matter further and am still of the opinion that this figure was high enough for that date.

I am fortified in this conclusion by the result of inquiries which I addressed to Dr. Moritz Elsas of Frankfort–on–Main, on whose authority I quote the following figures. The best–known estimate of the German pre–war income is Helfferich's in his Deutschlands Volkswohlstand 1888–1913. In this volume he put the national income in 1913 at 40–41 milliard gold marks, plus 2½ milliards for net income from nationalized concerns (railways, post office, etc.), that it is say, an aggregate of 43 milliards or 642 marks per head. Starting from the figure of 41 milliards (since the national services no longer produce a profit) and deducting 15 per cent for loss of territory, we have a figure of 34.85 milliards. What multiplier ought we to apply to this in order to arrive at the present income in terms of paper marks? In 1920 commercial employees obtained on the average in terms of marks 4½ times their pre–war income, whilst at that time workmen had secured an increase in their nominal wages of 50 per cent more than this, that is to say, their wages were 6 to 8 times the pre–war figure. According to the Statistischen Reichsamt (Wirtschaft und Statistik, Heft 4, Jahrgang 1) commercial employees at the beginning of 1921 earned, males 6? times and females 10 times as much as in 1913.[51] On the basis of the same proportion as in 1920 we arrive at an increase of 10 times in the nominal wages of workmen. The wages index number of the Frankfurter Zeitung for August 1921 estimates the wages per hour at 11 times the pre–war level, but, as the number of working hours has fallen from 10 to 8, these figures yield an increase of 8.8 times in the wage actually received. Since the wages of male commercial employees have increased less than this, since business profits in terms of paper marks only reach this figure of increase in exceptional cases, and since the income of the rentier, landlord, and professional classes has increased in a far lower proportion, an estimate of an 8–fold increase in the nominal income of the country as a whole at that date (August 1921) is likely to be an over–estimate rather than an under–estimate. This leads to an aggregate national income, on the basis of the Helfferich pre–war figures, of 278.80 milliard paper marks, and to an income of 4647 marks per head in August 1921.

No allowance is made here for the loss by war of men in the prime of life, for the loss of external income previously earned from foreign investment and the mercantile marine, or for the increase of officials. Against these omissions there may be set off the decrease of the army and the increased number of women employees.

The extreme instability of economic conditions makes it almost impossible to conduct a direct statistical inquiry into this problem at the present time. In such circumstances the general method of Dr. Elsas seems to me to be the best available. His results show that the figure taken above is of the right general dimensions and is not likely to be widely erroneous. It enables us, too, to put an upper limit of reasonable possibility on our figures. No one, I think, would maintain that in August 1921 nominal incomes in Germany averaged 10 times their pre–war level; and 10 times Helfferich's pre–war estimate comes to 6420 marks. No statistics of national incomes are very precise, but an assertion that in the middle of 1921 the German income per head per annum lay between 4500 marks and 6500 marks, and that it was probably much nearer the lower than the higher of these figures, say 5000 marks, is about as near the truth as we shall get.

In view of the instability of the mark, it is, of course, the case that such estimates do not hold good for any length of time and need constant revision. Nevertheless this fact does not upset the following calculation as much as might be supposed, because it operates to a certain extent on both sides of the account. If the mark depreciates further, the average income per head in paper marks will tend to rise; but in this event the equivalent in paper marks of the Reparation liability will, since it is expressed in terms of gold marks, rise also. A real alleviation can only result from a fall in the value of gold (i.e., a rise in world prices).

To the taxation in respect of the Reparation charge there must be added the burden of Germany's own government, central and local. By the most extreme economies, short of repudiation of war loans and war pensions, this burden could hardly be brought below 1000 paper marks per head (at 20 paper marks=1 gold mark), i.e., 60 milliards altogether, a figure greatly below the present expenditure. In the aggregate, therefore, 2170 marks out of the average income of 5000 marks, or 43 per cent, would go in taxation. If exports rise to 10 milliards (gold) and the average income to 6000 paper marks, the corresponding figures are 2500 marks and 42 per cent.

There are circumstances in which a wealthy nation, impelled by overwhelming motives of self–interest, might support this burden. But the annual income of 5000 paper marks per head is equivalent in exchange value (at an exchange of 20 paper marks to 1 gold mark) to $62.50, and after deduction of taxation to about $35, that is to say to less than 10 cents a day, which in August 1921 was the equivalent in purchasing power in Germany of something between 20 cents and 25 cents in the United States.[52] If Germany was given a respite, her income and with it her capacity would increase; but under her present burdens, which render saving impossible, a degradation of standards is more likely. Would the whips and scorpions of any Government recorded in history have been efficient to extract nearly half their income from a people so situated?

For these reasons I conclude that whilst the Settlement of London granted a breathing space to the end of 1921, it can be no more permanent than its predecessors.

EXCURSUS III

THE WIESBADEN AGREEMENT

In the summer of 1921 much interest was excited by reports of confidential interviews between M. Loucheur and Herr Rathenau, the Ministers of Reconstruction in France and Germany respectively. An agreement was provisionally reached in August 1921 and was finally signed at Wiesbaden on October 6, 1921[53]; but it does not come into force until it has received the approval of the Reparation Commission. This Commission, whilst approving the general principles underlying it, have referred it to the principal Allied Governments on the ground that it involves departures from the Treaty of Versailles beyond their own competence to authorize. The British delegate, Sir John Bradbury, has advised his Government that the Agreement should be approved subject to certain modifications which he sets forth; and his Report has been published.[54]

The Wiesbaden Agreement is a complicated document. But the essence of it is easily explained. It falls into two distinct parts. First, it sets up a procedure by which private French firms can acquire from private German firms materials required for reconstruction in France, without France having to make payment in cash. Secondly, it provides that, whilst Germany is not to receive payment at once for any part of these goods, only a proportion of the sum due is credited to her immediately in the books of the Reparation Commission, the balance being advanced by her to France for the time being and only brought into the Reparation account at a later date.

The first set of provisions has met with unqualified approval from every one. An arrangement which may possibly stimulate payment of Reparation in the form of actual materials for the reconstruction of the devastated districts satisfies convenience, economics, and sentiment in a peculiarly direct way. But such supplies were already arranged for under the Treaty, and the chief value of the new procedure lies in its replacing the machinery of the Reparation Commission by direct negotiation between the French and German authorities.[55]

The second set of provisions is, however, of a different character, since it interferes with the existing agreements between the Allies themselves as to the order and proportions in which each is to share in the available receipts from Germany, and seeks to secure for France a larger share of the earlier payments than she would receive otherwise. A priority to France is, in my opinion, desirable; but such priority should be accorded as part of a general re–settlement of Reparation, in which Great Britain should waive her claim entirely. Further, the Agreement involves an act of doubtful good faith on the part of Germany. She has been protesting with great vehemence (and, I believe, with perfect truth) that the Decisions of London exact from her more than she can perform. But in such circumstances it is an act of impropriety for her to enter voluntarily into an agreement which must have the effect, if it is operative, of further increasing her liabilities even beyond those against which she protests as impossible. Herr Rathenau may justify his action by the arguments that this is a first step towards replacing the Decisions of London by more sensible arrangements, and also that, if he can placate Germany's largest and most urgent creditor in the shape of France, he has not much to fear from the others. M. Loucheur, on the other hand, may know as well as I do, though speaking otherwise, that the Decisions of London cannot be carried out, and that the time for a more realistic policy is at hand; he may even regard his interviews with Herr Rathenau as a foretaste of more intimate relationships between business interests on the two sides of the Rhine. But these considerations, if we were to pursue them, would lead us to a different plane of argument.

Sir John Bradbury in his Report[56] on the Agreement to the British Government has proposed certain modifications which would have the effect of preserving the advantages of the first set of provisions, but of nullifying the latter so far as they could operate to the detriment of France's Allies.

I consider, however, that exaggerated importance has been attached to this topic, since the actual deliveries of goods made under the Wiesbaden or similar agreements are not likely to be worth such large sums of money as are spoken of. Deliveries of coal, dyestuffs, and ships, dealt with in the Annexes to Part VIII. of the Treaty are specifically excluded from the operation of the Wiesbaden Agreement which is expressly limited to deliveries of plant and material, and these France undertakes to apply solely to the reconstitution of the devastated regions. The quantities of goods, which French firms and individuals will be ready to order from Germany at the full market price, and which Germany can supply, for this limited purpose (so great a part of the cost of which is necessarily due to labor employed on the spot and not to materials capable of being imported from Germany), are not likely to amount, during the next five years, to a sum of money which the other Allies need grudge France as a priority claim.

My other reserve relates to the supposed importance of the Wiesbaden Agreement as a precedent for similar arrangements with the other Allies, and raises the general issue of the utility of arrangements for securing that Germany should pay in kind rather than in cash, for other purposes than those of the devastated areas.

It is commonly believed that, if our demands on Germany are met by her delivering to us not cash but particular commodities selected by ourselves, we can thus avoid the competition of German products against our own in the markets of the world, which must result if we compel her to find foreign currency by selling goods abroad at whatever cut in price may be necessary to market them.[57]

Most suggestions in favor of our being paid in kind are too vague to be criticized. But they usually suffer from the confusion of supposing that there is some advantage in our being paid directly in kind even in the case of articles which Germany might be expected to export in any case. For example, the Annexes to the Treaty which deal with deliveries in kind chiefly relate to coal, dyestuffs, and ships. These certainly do not satisfy the criterion of not competing with our own products; and I see very little advantage, but on the other hand some loss and inconvenience, in the Allies' receiving these goods direct, instead of Germany's selling them in the best market and paying over the proceeds. In the case of coal in particular, it would be much better if Germany sold her output for cash in the best export markets, whether to France and Belgium or to the neighboring neutrals, and then paid the cash over to France and Belgium, than that coal should be delivered to the Allies for which the latter may have no immediate use, or by transport routes which are uneconomical, when neutrals need the coal and what the Allies really require is the equivalent cash. In some cases the Allies have re–sold the coal which Germany has delivered to them,—a procedure which, in the case of an article for which freight charges cover so large a proportion of the whole value, involves a preposterous waste.

If we try to stipulate the precise commodities in which Germany is to pay us, we shall not secure from her so large a contribution, as if we fix a reasonable sum which is within her capacity, and then leave her to find the money as best she can. If, moreover, the sum fixed is reasonable, the annual payments will not be so large, in proportion to the total volume of international trade, that Great Britain need be nervous lest the payments upset the normal equilibrium of her economic life in any greater degree than is bound to result in any case from the gradual economic recovery of so formidable a trade rival as pre–war Germany.

Whilst I make these observations in the interests of scientific accuracy, I admit that projects, for insisting on payment in kind may be very useful politically as a means of escaping out of our present impasse. In practice the value of such deliveries would turn out to be immensely less than the cash we are now demanding; but it may be easier to substitute deliveries of materials in place of cash, which will in practice result in a great abatement of our demands, than to abate the latter in so many words. Moreover, protests, against leaving Germany free to pay us in cash by selling goods how and where she can, enlist on the side of revision all the latent Protectionist sentiment which still abounds. If Germany were to make a strenuous effort to pay us by exploiting the only method open to her, namely, by selling as many goods as possible at low prices all over the world, it would not be long before many minds would represent this effort as a plot to ruin us; and persons of this way of thinking will be most easily won over, if we describe a reduction in our demands, as a prohibition to Germany against developing a nefarious competitive trade. Such a way of expressing a desirable change of policy combines, with a basis of truth, sufficient false doctrine to enable The Times, for example, to recommend it in a leading article without feeling conscious of any intellectual inconsistency; and it furnishes what so many people are now looking for, namely, a pretext for behaving sensibly, without having to suffer the indignity and inconvenience of thinking and speaking so too. Heaven forbid that I should discourage them! It is only too rarely that a good cause can summon to its assistance arguments sufficiently mixed to insure success.

EXCURSUS IV

THE MARK EXCHANGE

The gold value of a country's inconvertible paper money may fall, either because the Government is spending more than it is raising by loans and taxes and is meeting the balance by issuing paper money, or because the country is under the obligation of paying increased sums to foreigners for the purchase of investments or in discharge of debts. Temporarily it may be affected by speculation, that is to say by anticipation, whether well or ill founded, that one or other of the above influences will operate shortly; but the influence of speculation is generally much exaggerated, because of the immense effect which it may exercise momentarily. Both influences can only operate through the balance of debts, due for immediate payment, between the country in question and the rest of the world: the liability to make payments to foreigners operating on this directly; and the inflation of the currency operating on it indirectly, either because the additional paper money stimulates imports and retards exports, by increasing local purchasing power at the existing level of values or because the expectation that it will so act causes anticipatory speculation. The expansion of the currency can have no effect whatever on the exchanges until it reacts on imports and exports, or encourages speculation; and as the latter cancels out, sooner or later, the effect of currency expansion on the exchanges can only last by reacting on imports and exports.

These principles can be applied without difficulty to the exchange value of the mark since 1920. At first the various influences were not all operating in the same direction. Currency inflation tended to depreciate the mark; so did foreign investment by Germans (the “flight from the mark”); but investment by foreigners in German Bonds and German currency (an exact line between which and short–period speculation it is not easy to draw) operated sharply in the other direction. After the mark had fallen to such a level that more than 25 marks could be obtained for a dollar, numerous persons all over the world formed the opinion that there would be a reaction some day to the pre–war value, and that therefore a purchase of marks or mark Bonds would be a good investment. This investment proceeded on so vast a scale that it placed foreign currency at the disposal of Germany up to an aggregate value which has been estimated at from $800,000,000 to $1,000,000,000. These resources enabled Germany, partially at least, to replenish her food supplies and to restock her industries with raw materials, requirements involving an excess of imports over exports which could not otherwise have been paid for. In addition it even enabled individual Germans to remove a part of their wealth from Germany for investment in other countries.

Meanwhile currency inflation was proceeding. In the course of the year 1920 the note circulation of the Reichsbank approximately doubled, whilst on balance the exchange value of the mark had deteriorated only slightly as compared with the beginning of that year.

Moreover, up to the end of 1920 and even during the first quarter of 1921 Germany had made no cash payments for Reparation and had even received cash (under the Spa Agreement) for a considerable part of her coal deliveries.

After the middle of 1921, however, the various influences, which up to that time had partly balanced one another, began to work all in one direction, that is to say, adversely to the value of the mark. Currency inflation continued, and during 1921 the note circulation of the Reichsbank was nearly trebled, bringing it up to nearly six times what it had been two years earlier. Imports steadily exceeded exports in value. Some foreign investors in marks began to take fright and, so far from increasing their holdings, sought to diminish them. And now at last the German Government was called on to make important cash payments on Reparation account. Sales of marks from Germany, instead of being absorbed by foreign investors, had now to be made in competition with sales from these same investors. Naturally the mark collapsed. It had to fall to a value at which new buyers would come forward or at which sellers would hold off.[58]

There is no mystery here, nothing but what is easily explained. The credence attached to stories of a “German plot” to depreciate the mark wilfully is further evidence of the overwhelming popular ignorance of the influences governing the exchanges, an ignorance already displayed, to the great pecuniary advantage of Germany, by the international craze to purchase mark notes.

In its later stages the collapse has been mainly due to the necessity of paying money abroad in discharge of Reparation and in repaying foreign investors in marks, with the result that the fall in the external value of the mark has outstripped any figure which could be justified merely as a consequence of the present degree of currency inflation. Germany would require a much larger note issue than at present, if German internal prices were to become adjusted to gold prices at an exchange of more than 400 marks to the dollar.[1] If, therefore, the other influences were to be removed, if, that is to say, the Reparation demands were revised and foreign investors were to take heart again, a sharp recovery might occur. On the other hand, a serious attempt by Germany to meet the Reparation demands would cause the expenditure of her Government to exceed its income by so great an amount, that currency inflation and the internal price level would catch up in due course the external depreciation in the mark.

In either event Germany is faced with an unfortunate prospect. If the present exchange depreciation persists and the internal price level becomes adjusted to it, the resulting redistribution of wealth between different classes of the community will amount to a social catastrophe. If, on the other hand, there is a recovery in the exchange, the cessation of the existing artificial stimulus to industry and of the Stock Exchange boom based on the depreciating mark may lead to a financial catastrophe.[59] Those responsible for the financial policy of Germany have a problem of incomparable difficulty in front of them. Until the Reparation liability has been settled reasonably, it is scarcely worth the while of any one to trouble his head about a problem which is insoluble. When stabilization has become a practicable policy, the wisest course will probably be to stabilize at whatever level prices and trade seem most nearly adjusted to at that date.